Question

P7-17 (similar to) 

Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. 

The firm's weighted average cost of capital is 14%, and it has $1,800,000 of debt at market value and $360,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 2020 through 2024, are given in the table, : Beyond 2024 to infinity, the firm expects its free cash flow to grow by 5% annually.

 a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.

 b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.

 c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?

 a. The value of Nabor Industries' entire company is $ _______ . (Round to the nearest dollar)

Answer 1

a

	WACC=	14.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	200000		200000	1.14	175438.5965
2	200000	0.00%	270000		270000	1.2996	207756.2327
3	270000	0.00%	340000		340000	1.481544	229490.3155
4	340000	0.00%	390000		390000	1.68896016	230911.3082
5	390000	0.00%	420000	4900000	5320000	1.925414582	2763041.294
	Long term growth rate (given)=	5.00%			Value of Enterprise =	Sum of discounted value =	3606637.75
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

b

3606637.75 = Equity value+1800000+360000

Equity value = 1446637.75

c

share price = equity value/number of shares

share price = 1446637.75/200000

share price = 7.23

Answer 2

	WACC=	14.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	200000		200000	1.14	175438.5965
2	200000	0.00%	270000		270000	1.2996	207756.2327
3	270000	0.00%	340000		340000	1.481544	229490.3155
4	340000	0.00%	390000		390000	1.68896016	230911.3082
5	390000	0.00%	420000	4900000	5320000	1.925414582	2763041.294
	Long term growth rate (given)=	5.00%			Value of Enterprise =	Sum of discounted value =	3606637.75